Dealerweb: CCLF obligation set to increase REG repo activity

May 11, 2018Anna Reitman

The US repo landscape is set to undergo significant change on Tuesday, as members of the Fixed Income Clearing Corporation (FICC) begin managing the committed liquidity required for the implementation of the Capped Contingency Liquidity Facility (CCLF), writes Tony Stanton, Director, Market Manager in Repo at Dealerweb for SFM.

The CCLF aims to support the repo marketplace in the event that a systemically important firm defaults, but will temporarily tie up extra liquidity from netting members to the central counterparty (CCP).

May 15, 2018 marks the six-month window where FICC members’ new funding obligations under the CCLF will be established. Netting members who present the highest cash settlement obligations would be required to maintain higher CCLF funding obligations starting later in November.

However, market participants are considering a different approach with REG repo trading to help streamline their capital requirements.

By trading on a forward start (T+1 REG) basis, the repo compares and novates prior to settlement date of the start leg, allowing both legs (start and close) to net on their respective settlement dates. This reduces the liquidity need and potential CCLF funding obligations. Naturally long firms can decrease their CCLF funding obligation, while shorts can benefit from a potentially advantageous level versus covering for cash. Since there is no funding impact, the calculation for the funding obligation is set at a CUSIP level. If the security is net flat, the obligation is zero regardless of when the short is covered.

On Dealerweb’s (electronic) repo platform, we have already begun to see an increase in REG v. cash repo trading, up 112% in Q1 2018 vs Q1 2017. Overall volumes on the platform increased close to $75 billion a day (single sided) in less than 2 years since Dealerweb’s electronic market launched.

This shift is a welcome change to the way in which the repo market currently operates. The 7 a.m. scramble for execution on T+0 basis, and the limited window of liquidity have long remained an inefficient way to fund a firm’s longs and shorts.

When we look at the increase in REG activity, it signals that participants welcome a reduction in both liquidity and market risk by funding as much of their book as possible on a forward start basis. Combined with reducing daylight overdraft (DOD) costs and the potential to lower funding obligations to the CCP under upcoming regulation, this can only encourage more REG activity and establish a more orderly repo Market less prone to volatile pricing swings.

While it remains to be seen if the CCLF funding obligation will impact available liquidity for cash repo trading, we are seeing the beginning of a much-needed change in the repo landscape.